Institutional Returns Finish Year Strong

CHICAGO—Institutional investors' returns from real estate finished 2014 by posting the best quarter of the year, the National Council of Real Estate Investment Fiduciaries said Monday. A year-over-year comparison of NCREIF Property Index data shows that returns were up for the full year as well as for the fourth quarter.

The NPI total return for Q4 '14 was 3.04%, which was the highest quarter for the year. That compares to 2.53% for Q4 2013. The return for the past four quarters was 11.82%, closer to the five-year annualized returns of 12.14% than the 10.98% of full-year '13.

NCREIF points out that these are all unleveraged returns, assuming the properties are purchased on an all-cash basis. “Due to the low interest rate environment, investors could achieve much higher leveraged returns,” according to NCREIF. Leveraged returns for Q4 reached 4.75% for those properties on which  NCREIF members used financial leverage, while for the full year leveraged returns were 18.67%.

Fundamentals continue to improve, says NCREIF, with NOI growth at 1.66% for the quarter and more than 6.5% for the year. Occupancy continued to increase and ended the year at 91.88%, representing the highest occupancy level since Q1 2008.

Apartment properties experienced a slight decline in occupancy during Q4, falling to 93.33% from 93.95% at the end of Q3. That's in keeping with recent norms: “apartment occupancy has bounced between 93% and 95% since 2010, with most of the quarterly movement up or down being reversed the following quarter or two,” according to NCREIF. Nonetheless, multifamily NOI rose almost 9% for the year.

Transaction volume rebounded strongly to 282 properties sold and 271 new buildings added during Q4. “This is the highest transaction volume since 2005 and indicates improving liquidity in the market,” according to NCREIF. It also eclipses the year-ago Q4 total of 237 properties and edges out the Q4 2012 figure of 268, a volume that was driven largely by concerns over a possible increase in the capital gains tax.

“A number of factors have been contributing to the strength of the institutional real estate market over this past year, including low real interest rates and strong job growth,” says William Hughes, board chair of NCREIF and global head of real estate research and strategy for UBS Realty Investors. “Overall completion of new space has been below average since the financial crisis so, as demand for space has picked up in the US, vacancy rates have fallen below historical averages. As a result, rents have been increasing. Real estate has delivered a competitive return relative to both stocks and bonds over the past year."

By property type, the star of Q4 was hotels, with a total return of 4.31% followed by industrial returns at 3.87%. Apartment had the lowest return for Q4 at 2.77%.

For the full year, industrial properties led with a total return of 13.42%, followed by retail at 13.12%. Apartments also posted the lowest return for the full year at 10.29%. It should be noted, according to NCREIF, that apartments had the highest return for several years immediately after the financial crisis, “so much of the difference we now see is catching up by the other property types as the recovery has matured.”

The NPI is based on 7,062 investment-grade, income-producing properties with a market value of $409 billion consisting of apartments, office, retail, industrial and hotels. The breakdown by market value is 25% apartment, 36% office, 24% retail, 13% industrial and 2% hotel properties.